Unforeseeable Market Surprises | Nelson Financial Planning

The current political atmosphere, economic recovery following the COVID-19 pandemic, and recently passed legislation will significantly impact your financial decisions in 2021. Don’t be caught unawares by unforeseeable market surprises! Work with a financial planner to help you navigate your retirement strategy.

Political Control and the Stock Market

Presidential elections tend to significantly impact the stock market and the economy as a whole. With the inauguration of President Joe Biden, you may be wondering, “How will this new presidency affect the stock market?”

No one knows exactly how the market will perform in any given year and past performance is no guarantee of future results. However, MFS Investment Management—an American-based global investment management company—has put together a chart offering some historical perspective. From 1926-2018, the S&P 500 index experienced different annual average returns in relation to the president’s political party and the majority party in both houses of Congress. Consider these five findings:

The S&P 500 gained 15 percent per year under Democratic presidents and Republican-led Congresses.
The S&P gained 6.6 percent under Republican presidents and Democrat-led Congresses.
The S&P gained 11.4 percent when the White House and both Congresses were run by the same political party.
The S&P gained 15.6 percent under Democratic presidents and split Congresses (one party controlling the House and the other controlling the Senate).
The S&P gained 0.9 percent under Republican presidents and split Congresses. This seemingly skewed data entry could be partly caused by the fact that this scenario has occurred infrequently over the past century.

Having a Democratic president and 50-50 tie in the Senate is the scenario we’re entering right now—the very definition of “divided government.” But if market data tells us one thing, it’s that “gridlock is good.” If the stock market moving forward follows historical trends, we could be in for a healthy S&P 500 annualized return for at least the next four years. That level of certainty—or at least the lack of uncertainty—really boosts the economy and helps businesses make decisions.

COVID-19 and the Economy

While historical market data is useful to consider, a unique and tremendously impactful factor is present in our current economic climate—a deadly pandemic. Moving into 2021, the Biden administration will have to deal with the fallout of COVID-19.

The damage this pandemic has caused is specific to certain sectors of the economy, while others are fairing just fine. Lower-wage jobs have also been disproportionately affected, with engineering, technology, finance, and other professional jobs left relatively unscathed.

Despite undeniable economic damage, the underlying economy is actually showing some strong performance and signs of recovery. Here is some economic data from the end of 2020 to consider as the new year gains steam:

National unemployment dropped to 6.9 percent—nowhere near 3.3 percent, which is where unemployment was a year ago, but things are moving in the right direction.
Corporate earnings for Q3 2020 declined by 7.5 percent compared to the previous year. This is far less severe than the anticipated 21 percent decline.
The Institute for Supply Management (ISM)—a widely looked-at manufacturing index—rose to 59.3, the highest measurement since 2018.
New factory orders, which serve as forward-looking economic indicators, rose to the highest level they’ve been in 17 years.

Changes Implemented by the Secure Act

The traditional retirement strategies that financial planners have recommended for decades were upended in early 2020 with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation is a significant departure from what the rules used to be regarding retirement accounts.

Before this new bill passed, beneficiaries had the option of spreading out distributions from inherited retirement accounts throughout their lifetime. They would have been required to take out 2 to 3 percent each year, but then the rest of the money could remain in the account, earning interest on a compounded, tax-deferred basis for decades.

With the SECURE Act, beneficiaries must empty inherited retirement accounts within 10 years. This new rule greatly accelerates the payment of taxes on that sum of money and shortens the amount of time the funds can grow.

Adjusting Your Retirement Strategies in Response to the Secure Act

The tax implications of the SECURE Act are profound. There hasn’t been much analysis yet because the COVID-19 pandemic broke out shortly after the bill was passed, distracting the entire country in the process. Still, everyone should adjust their retirement planning strategies in response to the SECURE Act. Here’s how to be more tax-efficient, not just for you, but for succeeding generations.

Use More of Your Retirement Account Now

The old recommendation was to pay for things like end-of-life medical care with an after-tax account to keep taxes low and preserve any IRAs for the next generation. However, because of the new 10-year rule, it now makes more sense to reverse this recommendation in many cases. Using more of your before-tax retirement accounts now means you don’t end up passing on more taxes to your beneficiaries, who may be in a higher tax bracket when they receive the money than you are as a retiree living on social security.

Pull down the Balance of Your Retirement Account With a Qualified Charitable Distribution.

This strategy involves sending your required minimum distribution directly to charity so you don’t have to report that portion as income on your tax return.

Consider Converting Your Account Into a Roth IRA.

From a historical standpoint, financial planners have generally recommended traditional IRAs to most of their clients. However, because of the SECURE Act’s 10-year rule, Roth IRAs—which are comprised of after-tax dollars—are getting more attention. Just remember that if you convert a traditional IRA into a Roth account, you must be able to afford the taxes now.

If you need help navigating unforeseeable market surprises and changes brought about by the SECURE Act, please contact Nelson Financial Planning for a consultation today.